Monday, May 14, 2018

83. New Views Shared at Farm Profitability Panel at SCA Expo

May 14, 2018
About 150 SCA Expo attendees joined a lively session on the topic of "Farm Profitability: Impact of Best Practices" on Apr. 20. The five panelists themselves came from five different countries.
  • Ruth Ann Church presented data from Rwanda, wearing her "researcher hat" from Michigan State University;
  • Paulo Van der Ven, Managing Director at RD2 Vision in Montpellier, France, shared a multi-country overview;
  • Paul Stewart, Global Coffee Director at Technoserve and based in Ethiopia, shared data from Kenya and
  • Mark Lundy, Senior Researcher at Centro Internacional de Agricultura Tropical, CIAT, in Colombia shared insights from their ground-breaking work in Nariño, Colombia. 
  • Moderator Kraig Kraft, a CRS manager based in Nicaragua, expertly guided the session. 

Eventually, the session should appear as a podcast on the SCA podcast site. Watch this space!

The session started by introducing the audience to a simplified formula for profitability:

Kraft then outlined how each of these boxes includes a lot of complexity. 
  • KGs represent "yield" or "productivity" of the coffee plant. We know productivity is highly dependent on agronomic factors like elevation, rainfall, soil quality, temperatures, etc.
  • PRICE implies the "farmgate price" when we're discussing farm profitability, but often other prices are used in the research, such as the NY C price, FOB or EXW prices, "market prices" and government-set floor prices.
  • COSTS implies the labor and inputs needed to cultivate the trees and harvest the coffee. But which labor? There is paid and unpaid labor. And which inputs? Typically, it's fertilizer, pesticides and herbicides, but there are others.
  • PROFIT also has many types. There's profits (positive) and profit losses, to begin with. There is gross profit and net profit, and some people prefer to use the terms "margins", "net turnover" or "net revenue" or "net income" for the same thing. 
The research from each of the speakers emphasized a different part of this formula. 

The emphasis in Van der Ven's part was the relationship between KGs and Costs. He gave an overview of one of key insights from the SCA Farm Profitability report, which he helped write. Often farms where KGs (productivity) and costs are low are more profitable than others, all other things equal. This is surprising for some to hear, since it is often assumed that higher productivity always leads to more profitability.  First, he described how the progression from "less profitable" to " more profitable" on a coffee farm is not always linear. It's possible that costs increase for a few seasons before profits accrue. Secondly, Van der Ven showed how RD2's literature review of 11 different studies, including data from 10 countries, allowed them to create the following graph. It illustrates how low input farms have low yields and low production costs/ha, but are often still profitable.

Each circle represents a country and the size of circle-points is proportional to yield.
Low input farms have low yield, low production costs (x axis) and often are profitable (y axis) 
Source: 2017 RD2 Vision report for SCA.

Thirdly, Van der Ven makes an often over-looked observation. Coffee is unique, because with fruit trees, income is almost never zero. If the farmer does nothing the entire year, he/she can often still get some fruit (coffee cherry) off the tree and sell it. This doesn't mean there is profit, but it means there is some revenue, even when costs (investments) are negligible. 

Van der Ven concluded with the key take-away that more applied research is needed, as opposed to measurements and recommendations from ideal demonstration plots. He emphasized that real obstacles, costs and outcomes can be very different in "actual farm life" than that which is possible in a controlled experimental farm. Solutions for farmers need to be based on assessments of whether a new practice will realistically generate profits.

Stewart's presentation focused on how training can boost KGs without increasing Costs. His data was from a project in Kenya where farmers had been trained in "climate smart" practices. This list of practices included at least six practices that are in addition to the typical six practices understood to comprise "best practices." Stewart emphasized that these are practices that few smallholders currently implement, but they are low-cost or no-cost, easy and quickly impact productivity. The slide shows impressive results.

The chart shows how the trees on the demonstration plots (right side, n=18) fared seven times better than the average coffee trees in Kenya (left side, n=335). In other words, adoption of the climate smart practices resulted in up to a seven-fold increase in yields.

Church's presentation focused on measurements of the impact of PRICE on profitability. Sharing data from Rwanda and the Feed the Future Africa Great Lakes Coffee (AGLC) support program, she started with a slide showing the response to the farmer survey (n=1024) asking which three factors farmers would say are the biggest obstacles to deciding to invest more in coffee. "Low cherry price" ranked the highest, and topics like training and high costs ranked low.

Prices matter to farmers, more than getting more training or lowering costs. Source: AGLC data, 2016, n=1024. Innovation Lab for Food Security, Research Paper no. 32.

The presentation continued to show how in Rwanda over a three year period, when the farm-gate price for cherry rose 55%, there were significant increases in the number of farmers implementing best practices, profits went up (not surprisingly), and importantly, productivity rose 22%.  It is notable that this yield improvement occured in a year where there was a drought and farmers had no idea the higher price was coming.

Lundy's presentation elaborated further on the importance of PRICE. He shared insights from CIAT research on how to better understand the diversity of farms and farmer outcomes in a coffee-growing region like Narino. First, CIAT segmented farmers by significant characteristics like the percent of household income from off-farm wages (click here for details). Then, they categorized the markets into which farmers sell, noting the different PRICES that each market pays. By over-lapping the two, Lundy showed new insights into when and why farmers are profitable.

Production Costs - average (top bar) and 3 "types". Source: 2013 Narino, Colombia study by CIAT.

The three different markets are: Mass Specialty A, Mass Specialty B (with higher prices), and Microlots, offering the highest prices of all, but also the lowest volumes of purchases. By over-laying average farm-gate prices from these markets over the farm costs illustrated above, it was clear that only those farmers selling to microlot buyers would make a profit. The implications of this has motivated a successful effort to improve livelihoods in Narino, but the implications are also daunting when one imagines how many coffee farmers there are, and how few microlot buyers there are today. As a key take-away, Lundy re-iterated this point:
"The most important finding of the research is that we should not be talking about cost of production but costs of production. Different kinds of coffee growers have different efficiencies and different costs of production and these differences get lost when data are aggregated."

Conclusion: Kraft guided the question and answer session, which included questions about whether direct trade, on average, results in better profits for farmers. Another participant observed how corruption, like counterfeit fertilizers, can create so many extra costs for farmers. Kraft summarized the session by concluding that
finding the funding and expertise to conduct further research on these topics is paramount for the specialty coffee industry.

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